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Will Site-Neutral Payment Reform Rule Cause Hospital Closures?

Some long-term acute care facilities are expected to close up shop because of lost revenue stemming from site-neutral Medicare payment reform rules.

August 09, 2016 - Many long-term acute care facilities are projected to close over the next few years as Medicare enacts a payment reform rule that will introduce site-neutral payments for certain long-term acute care services, according to a Standard & Poor’s Global report.

“We expect a material portion of the approximately 435 LTAC [long-term acute care] facilities nationwide to close over the next few years amid the phase-in of lower reimbursement for non-eligible LTAC patients,” stated the report.

“Certain smaller, non-rated LTAC operators have already closed their doors in anticipation of the criteria rollout, and some of the rated companies have begun implementing site closures in certain facilities that have weak prospects of remaining profitable under the new patient criteria.”

Starting in October 2015, CMS introduced site neutral payments for certain long-term acute care services to reduce overall Medicare spending. Rather than reimburse providers under the higher long-term acute care prospective payment system, some services are paid the lesser of the per diem Medicare rates paid for patients with the same diagnosis in the inpatient prospective payment system or the estimated cost of care.

The payment reform rule is considered site-neutral because acute care hospitals are reimbursed the same amount for the service.

CMS also enacted patient eligibility requirements for services that can be billed under the higher rates of the long-term acute care prospective payment system. To qualify, patients must spend at least three days in a hospital’s intensive care unit or coronary care unit prior to being admitted to the long-term acute care facility. Patients who require a minimum of 96 hours on a ventilator and had an acute care hospital stay prior to being admitted to the long-term acute care venue also qualify under the rule’s criteria.

The site neutral payment requirements have caused healthcare revenues to drop for some long-term acute care hospitals. Before the rule, the facilities received about $41,000 on average for a 25-day stay in 2015, stated the report. However, once the site neutral payment model is fully phased in, these care settings will be paid about $10,000 on average for a 25-day stay.

To help hospitals adjust with the lost revenue source, CMS has established a gradual roll-out of the Medicare payment reform rule. In October 2015, CMS started to reimburse non-eligible long-term acute care services based on 50 percent of the current long-term acute care payment system rate and 50 percent of the site neutral rate. During the two year period, Standards & Poor’s Global found that care facilities will receive about $25,500 for a 25-day stay.

CMS plans to fully implement site neutral payments by October 2017. Although some healthcare organizations may follow a modified phase in arrangement depending on when the organization submits Medicare cost reports.

For example, two healthcare systems that manage some long-term care facilities will be less affected by the payment reform than the rest of the industry, stated the report. While 20 to 30 percent of their current patient population will shift to the lower site neutral payment rate, the healthcare systems are projected to handle the revenue loss because they have a mix of free-standing long-term acute care facilities and hospital-within-hospital facilities, which typically treat higher acuity patients.

To mitigate the effects of the new Medicare reimbursement rates, some long-term acute care organizations have taken steps to diversify their care settings through healthcare mergers and acquisitions, optimize their portfolios by selling non-strategic care facilities, and changing year-end Medicare reporting dates to delay the implementation of the reimbursement reform.

Long-term acute care providers have also attempted to reduce healthcare costs and attract more patients that require services that qualify for the higher long-term acute care payment rate. Some providers have sought to capture eligible cases from nearby facilities that are scheduled to close and acquire patients that are eligible under the new requirements but were not previously treated by a long-term acute care facility.

The analysts revealed that these efforts can help to balance some of the potential revenue losses, but they will not fully offset the impact of the Medicare payment reform rule. The report estimated revenue to decrease by about five percent for larger long-term acute care providers and ten percent for smaller, less diverse providers.

“If the industry manages to adapt to and offset the cost reductions, for example by expanding to serve eligible patients who were not previously served by LTACs, we would expect CMS to pursue additional initiatives to control the rapidly growing costs of LTAC care,” the report stated.

“However, if the change in eligibility criteria causes a large proportion of LTAC facilities to close down, we believe Medicare would likely temper the severity of the reimbursement reduction in phase two, given that CMS views LTAC services as an appropriate and cost-efficient setting for certain patients.”